How competition can encourage unethical business practices

In Ernst & Young's 2013 EMEIA Fraud Survey, 3,000 board members, executives, managers and their teams were asked about the levels of pressure on today’s business. There were three clear messages:

Execs and their teams are under increased pressure to produce growth and profit in challenging conditions;

57% believe that bribery and corruption are widespread in their countries;

Compliance programs work – but not well enough.

The role of the European Union within compliance issues is becoming more and more important (as outlined in our recent blog post). The European Union describes compliance as 'respecting the law and proactively respecting competition rules'. Often these laws and competition rules are unfairly regarded by business as “red tape” – regulations to get in the way of business not to foster it. However, some recent cases demonstrate that this is not the case.

Consider European fines for cartels. A cartel is recognised as a group of similar, independent companies which join together to fix prices, to limit production or to share markets or customers between them. Instead of competing with each other, cartel members rely on each others' agreed course of action, which reduces their incentives to provide new or better products and services at competitive prices. As a consequence, their clients (consumers or other businesses) end up paying more for less quality. Cartels are illegal under EU competition law and the European Commission imposes heavy fines on companies involved in a cartel. By 2 April more than €1.4 billion had been levied in fines by the European Union in 2014. This represented almost 80% of the total fines imposed in 2013 and means that, unless there is a major change in the rest of the year, 2014 will see the highest levels of cartel fines since 2010.

Halting the renaissance of corruption

It is perhaps surprising that such unethical business practices persist in 2014. The growing power of social media combined with a wider business acceptance of what ethical business practices mean will lead to increasing levels of business transparency and better corporate ethics. The current era of transparency feels light years away from the past where private deals between businesses could benefit business to the detriment of the customer. It can be easy to forget that huge strides have been taken in the past decade, with companies encouraging whistleblowing by employees, and businesses working harder to ensure that not only their own practices are ethical but also those of their suppliers and the suppliers to their suppliers.

But the nature of business – especially those businesses with complex supply chains – will always mean that companies find it challenging to ensure compliance and high levels of ethical business practice – even with increasing levels of business transparency. Bribery and corruption issues continue to challenge even the most robust compliance organisations. As a result, some companies and/or individuals respond to this pressure by taking short cuts, acting unethically or even illegally.

And, of course, some countries are perceived as being more corrupt than others. Transparency International is the global civil society organisation leading the fight against corruption. The corruption perception index of Transparency International ranks countries according to its perceived levels of corruption. First launched in 1995, the Corruption Perceptions Index has been widely credited with putting the issue of corruption on the international policy agenda. Based on expert opinion, the index measures the perceived levels of public sector corruption in countries worldwide, scoring them from 0 (highly corrupt) to 100 (very clean). In 2013, not one single country got a perfect score.

Is Transparency International's measure of corruption still valid?

The CPI's reliance on the opinions of a small group of experts and business people has been questioned. Alex Cobham (the Centre for Global Development), notes that the Index "embeds a powerful and misleading elite bias in popular perceptions of corruption" and can lead to inappropriate policy responses. Others argue it is impossible to communicate in one single number the scale and depth of a complex issue like corruption.

Transparency International has defended its approach, arguing that capturing experts' perceptions is the most reliable method of comparing relative corruption levels across countries. "There is no meaningful way to assess absolute levels of corruption in countries or territories on the basis of hard empirical data. Possible attempts to do so, such as by comparing bribes reported, the number of prosecutions brought or studying court cases directly linked to corruption, cannot be taken as definitive indicators of corruption levels. Instead, they show how effective prosecutors, the courts or the media are in investigating and exposing corruption." [www.theguardian.com]

The CPI may be Transparency International's most well-known product, but Transparency International recognise that the CPI alone cannot offer a complete picture. Other supporting indexes offered include the Global Corruption Barometer, which looks at citizens’ perceptions and experiences of corruption, and the Bribe Payers Index, which ranks exporting countries according to the perceived likelihood that their firms will bribe abroad.

It is clear that businesses have a lot to consider in their efforts to drive profitability and gain a competitive edge. Businesses will need to manage their risk in many ways, but those who manage it most effectively will have a robust third party due diligence programme with consistent processes, applications and audit capabilities.

End note

If you are looking for ways to gain more transparency over your customers and suppliers, why not look at the range of solutions that LexisNexis offers – click here for more information.

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